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When discount retailers entered the compact disc market in the early 1990s, the average price of CDs dropped from $15 to as low as $10. Then, according to a federal lawsuit filed in the Southern District of New York Tuesday by attorneys general from 30 states and territories, the major music companies began strong-arming those retailers through the use of “harsh” minimum advertising policies (MAPs), and prices returned to their former levels. “These illegal actions certainly have not been music to the ears of the public,” New York Attorney General Eliot Spitzer said yesterday at a Manhattan press conference, adding that damages from the case, if successful, could be used to fund school music programs. Alleging violations of Section 1 of the Sherman Antitrust Act, the state attorneys general say that collusion among the five distributors that dominate the industry, music labels, and major retailers such as Tower Records has cost consumers as much as $480 million over a three-year period beginning in 1995. The action, which seeks an injunction, treble damages, and attorney’s fees, comes on the heels of the Federal Trade Commission’s May announcement that five major distributors, including Sony Corp. of America and Bertelsmann Music Group (BMG), would sign a consent decree in which the companies agreed to end the pricing policies. Private suits have also been launched in several jurisdictions. The companies began instituting MAP policies in the early 1990s. According to the complaint, “retailers could not obtain reimbursement for advertising expenditures for titles advertised below the prices listed on the pricing schedules. But these MAP policies did not push back the rising tide of price competition.” The complaint charges that the move to strengthen the policies began in earnest in 1995, when K-Mart, Target, and other discount retailers moved aggressively to cut prices. The record companies became concerned that the market for CDs as a whole was being undercut because the discounters were using CDs as “loss-leaders,” luring customers into the store where they would then buy other merchandise. A seminal event, the complaint states, was a February 1995 address to the National Association of Recording Merchandisers (NARM) by Jack Eugster, CEO of Musicland Stores Corporation. Eugster said that partnerships between retailer, distributor, and labels needed to be strengthened. “Our industry health is going to depend on proactive programs that are targeted to prevent the devaluation of CDs,” he said, adding that MAP programs “accomplish their goals best when the MAP price is sufficiently above wholesale cost as to not de-value the product in the consumer’s mind.” The suit also alleges that Tower Records and other major retailers, which were losing market share and cut their own prices in response to the discount chains, put increasing pressure on the distributors to toughen the terms and strengthen the enforcement of the MAP policies. In response, the distributors’ MAP policies evolved almost in lock-step, according to the complaint, with all sharing three key features. First, existing bans on communicating discounted prices to consumers were expanded to include in-store displays and promotions, with the only exception being the small sticker price on the CD itself. Second, retailers who violated the policy faced a loss of all promotional funds for 60 to 90 days, and in some cases, the loss of funds for the entire chain. Finally, the complaint says that the policies applied to any advertisement or promotion, regardless of whether funds from the distributor or label were used to pay for that ad or promotion. ‘BLUNT’ INSTRUMENTS The complaint states that the companies “transformed their MAP programs into blunt and effective instruments for putting an end to price competition.” The distributors, however, insist that the MAP policies were a legitimate response to the discount retailers’ loss-leader strategy. “We still believe that MAP was a legitimate and appropriate practice and we are confident that the courts will reach the same conclusion,” Keith Estabrook, spokesperson for BMG, said Tuesday. The proposed settlement with the FTC, in which the companies admit no wrongdoing, would prohibit them from linking any promotional funds to the advertised prices offered by their retailer customers for the next seven years. After that, the companies would be prohibited for an additional 13 years from conditioning promotional money on the prices contained in advertisements for which they do not pay. But antitrust specialist expert Herbert Hovenkamp of the University of Iowa College of Law said the consent decree will have little impact on the suit filed yesterday, simply because the companies refused to admit wrongdoing. “Had they resisted and denied liability and had there been full FTC proceedings on the merits and a determination, that would have made it a much stronger case,” he said. Hovenkamp said the attorneys general, who began banding together in the 1980s to bring actions as a group, “have become quite good at these coordinated challenges to antitrust violations. “And they always like price-fixing cases because they are among the easiest to prove,” he said. Though the FTC has the power to issue fines, only individual lawsuits or those brought by the attorney general on behalf of state residents can provide relief for consumers, the professor said. Hovenkamp said that making a case for damages is easier for the attorneys general because they can prove them in the aggregate, unlike the plaintiffs in the individual law suits filed in different states, including a class action filed in Connecticut in June against the major distributors and labels.

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